UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended March 31, 2003
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Commission file number 33-30427
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REDWOOD MORTGAGE INVESTORS VII, a California Limited Partnership
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(exact name of registrant as specified in its charter)
California 94-3094928
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(State or other jurisdiction of I.R.S. Employer
incorporation of organization) Identification No.
900 Veterans Blvd., Suite 500, Redwood City, CA 94063
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(address of principal executive office)
(650) 365-5341
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES XX NO
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO NOT APPLICABLE X
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest date.
NOT APPLICABLE
1
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
BALANCE SHEETS
MARCH 31, 2003 and DECEMBER 31, 2002 (unaudited)
ASSETS
March 31, December 31,
2003 2002
----------------- ----------------
Cash $ 259,681 $ 1,057,845
----------------- ----------------
Loans
Loans, secured by deeds of trust 7,272,410 6,423,984
Loans, unsecured 213,174 216,770
----------------- ----------------
7,485,584 6,640,754
Less allowance for loan losses (769,510) (791,882)
----------------- ----------------
Net loans 6,716,074 5,848,872
----------------- ----------------
Interest and other receivables
Accrued interest 366,125 304,936
Advances on loans 19,405 17,230
----------------- ----------------
Total interest and other receivables 385,530 322,166
----------------- ----------------
Investment in limited liability company 1,273,543 1,212,722
----------------- ----------------
Real estate owned, held for sale 684,391 683,136
----------------- ----------------
Prepaid expenses 2,663 -
----------------- ----------------
Total assets $ 9,321,882 $ 9,124,741
================= ================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ 250,000 $ -
Accounts payable 6,718 2,593
Payable to affiliate 40,577 32,176
Deferred interest - 37,704
---------------- ---------------
Total liabilities 297,295 72,473
---------------- ---------------
Partners' capital
Limited partners' capital, subject to redemption 9,012,782 9,040,290
General partners' capital 11,805 11,978
---------------- ---------------
Total partners' capital 9,024,587 9,052,268
---------------- ---------------
Total liabilities and partners' capital $ 9,321,882 $ 9,124,741
================ ===============
The accompanying notes are an integral part of these financial statements.
2
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2003 and 2002 (unaudited)
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
2003 2002
----------------- -----------------
Revenues
Interest - on loans $ 164,099 $ 295,152
Interest - interest bearing accounts 1,570 1,085
Late charges 6,627 4,500
Other income 1,010 11,307
----------------- -----------------
173,306 312,044
----------------- -----------------
Expenses
Mortgage servicing fees 16,154 51,667
Interest on note payable - bank 169 22,227
Clerical costs through Redwood Mortgage Corp. 6,485 8,014
Asset management fees 8,517 8,881
Provisions for losses on loans and real estate (22,372) 5,731
Professional services 17,318 16,235
Printing, supplies and postage 1,586 1,235
Other 1,204 1,423
----------------- -----------------
29,061 115,413
----------------- -----------------
Net income $ 144,245 $ 196,631
================= =================
Net income: To general partners (1%) 1,442 1,966
To limited partners (99%) 142,803 194,665
----------------- -----------------
$ 144,245 $ 196,631
================= =================
Net income per $1,000 invested by limited partners for
entire period
-where income is reinvested and compounded $ 16 $ 21
================= =================
-where partner receives income in monthly distributions $ 16 $ 21
================= =================
The accompanying notes are an integral part of these financial statements.
3
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 and 2002(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------------------
2003 2002
--------------- ---------------
Cash flows from operating activities
Net income $ 144,245 $ 196,631
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for (recovery of) losses on loans and real estate (22,372) 5,731
Early withdrawal penalty credited to income (755) (2,663)
Change in operating assets and liabilities
Accrued interest and advances on loans (63,364) 176,332
Accounts payable and other liabilities (25,178) 13,040
Prepaid expenses (2,663) -
--------------- ---------------
Net cash provided by operating activities 29,913 466,949
--------------- ---------------
Cash flows from investing activities
Principal collected on loans 446,574 1,040,727
Loans originated (1,295,000) (563,714)
Payments for real estate held for sale (1,255) (1,801)
Proceeds from sale of real estate held for sale - 2,565
Investments in limited liability company (60,821) -
Proceeds from unsecured loans 3,596 3,750
--------------- ---------------
Net cash provided by (used in) investing activities (906,906) 481,527
--------------- ---------------
Cash flows from financing activities
Net increase (decrease) in line of credit 250,000 (700,000)
Partners withdrawals (171,171) (330,172)
--------------- ---------------
Net cash provided by (used in) financing activities 78,829 (1,030,172)
--------------- ---------------
Net decrease in cash (798,164) (81,696)
Cash - beginning of year 1,057,845 389,844
--------------- ---------------
Cash - end of period 259,681 308,148
=============== ===============
Cash payments for interest $ 169 $ 22,227
=============== ===============
The accompanying notes are an integral part of these financial statements.
4
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003 (unaudited)
Note 1 - General
In the opinion of the management of the Partnership, the accompanying
unaudited financial statements contain all adjustments, consisting of normal,
recurring adjustments, necessary to present fairly the financial information
included therein. These financial statements should be read in conjunction with
the audited financial statements included in the Partnership's Form 10-K for the
fiscal year ended December 31, 2002 filed with the Securities and Exchange
Commission. The results of operations for the three month period ended March 31,
2003 are not necessarily indicative of the operating results to be expected for
the full year.
Note 2 - Summary of Significant Accounting Policies
Loans, secured by deeds of trust
At March 31, 2003 and December 31, 2002 there were loans categorized as
impaired by the Partnership of $96,716 and $96,716, respectively. In addition,
the impaired loans had accrued interest and advances totaling $7,841 and $7,841
at March 31, 2003 and December 31, 2002, respectively. The reduction in carrying
value of the impaired loans of $6,620 and $6,620 at March 31, 2003 and December
31, 2002, respectively, is included in the allowance for loan losses. The
average recorded investment in the impaired loans was $96,716 and $493,074 for
March 31, 2003 and December 31, 2002, respectively.
At March 31, 2003 and December 31, 2002, the Partnership had nine loans
past due 90 days or more totaling $3,034,446 and $2,913,212 (41.73% and 45.35%
of the secured loan portfolio), respectively. The Partnership does not consider
these loans to be impaired because there is sufficient collateral to cover the
amount outstanding to the Partnership and is still accruing interest on these
loans.
Allowance for loan losses
The composition of the allowance for loan losses as of March 31, 2003 and
December 31, 2002 was as follows:
March 31, December 31,
2003 2002
--------------- ----------------
Impaired loans $ 6,620 $ 6,620
Specified loans 163,731 163,731
General 510,828 533,200
Unsecured loans 88,331 88,331
--------------- ----------------
$ 769,510 $ 791,882
=============== ================
Activity in the allowance for loan losses is as follows for the three
months ended March 31, 2003 and year ended December 31, 2002:
March 31, December 31,
2003 2002
--------------- ----------------
Beginning balance $ 791,882 $ 887,578
Provision for loan losses - 20,394
Recoveries (22,372) (40,433)
Restructures - (64,210)
Write-offs - (11,447)
--------------- ----------------
$ 769,510 $ 791,882
=============== ================
5
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003 (unaudited)
Note 2 - Summary of Significant Accounting Policies (continued)
Income taxes
No provision for federal and state income taxes (other than an $800 state
minimum tax) is made in the financial statements since income taxes are the
obligation of the partners if and when income taxes apply.
Reclassifications
Certain reclassifications, not affecting previously reported net income or
total partners' capital, have been made to the previously issued financial
statements to conform to the current year classification.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
note 3 - General Partners and Related Parties
The following are commissions and fees, which will be paid to the general
partners.
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, the Partnership may collect an amount equivalent to 12%
of the loaned amount until 6 months after the termination date of the offering.
Thereafter, loan brokerage commissions (points) will be limited to an amount not
to exceed 4% of the total Partnership assets per year. The loan brokerage
commissions are paid by the borrowers and thus, are not an expense of the
Partnership. During the three months through March 31, 2003 and 2002, loan
brokerage commissions paid by the borrowers were $42,775 and $3,900,
respectively.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid
principal balance of the loan portfolio, or such lesser amount as is reasonable
and customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued. Additional service fees are recorded upon the receipt of any
subsequent payments on impaired loans. Mortgage servicing fees of $16,154 and
$51,667 were incurred for the three months through March 31, 2003 and 2002,
respectively. The Partnership has a payable to Redwood Mortgage Corp. for
servicing fees of $40,577 and $32,176 at March 31, 2003 and December 31, 2002,
respectively.
Asset management fees
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8
of 1% annually). Asset management fees of $8,517 and $8,881 were incurred for
the three months through March 31, 2003 and 2002, respectively.
6
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003 (unaudited)
Note 3 - General Partners and Related Parties (continued)
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. Such fees are incurred by the
borrowers and are paid to parties related to the general partners.
Operating expenses
Redwood Mortgage Corp., an affiliate of the general partners, is reimbursed
by the Partnership for all operating expenses actually incurred by it on behalf
of the Partnership, including without limitation, out-of-pocket general and
administration expenses of the Partnership, accounting and audit fees, legal
fees and expenses, postage and preparation of reports to limited partners.
During the three months through March 31, 2003 and 2002, operating expenses
totaling $6,485 and $8,014, respectively, were reimbursed to Redwood Mortgage
Corp.
Note 4 - Real Estate Held for Sale
The following schedule reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, including
estimated costs to sell as of March 31, 2003 and December 31, 2002:
March 31, December 31,
2003 2002
---------------- ---------------
Costs of properties $ 1,264,477 $ 1,263,222
Reduction in value (580,086) (580,086)
---------------- ---------------
Real estate held for sale $ 684,391 $ 683,136
================ ===============
Note 5 - Investment in Limited Liability Company
As a result of acquiring real property through foreclosure, the Partnership
transferred its interest (principally land and building) to a limited liability
company ("LLC"), Stockton Street Property Company LLC, which is owned 34% by the
Partnership and 66% by an affiliate. Development costs are being capitalized;
thus, there was no income or expense recognized by Stockton Street Property
Company during the three months through March 31, 2003 and year 2002. During
2002, the LLC completed construction and now intends to sell the property. The
Partnership expects to realize a profit from the venture.
Summarized financial information of the LLC at March 31, 2003 and December
31, 2002 is as follows:
March 31, December 31,
2003 2002
---------------- -----------------
Assets $ 1,875,007 $ 1,814,186
Liabilities (601,464) (601,464)
---------------- -----------------
Total $ 1,273,543 $ 1,212,722
================ =================
7
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003 (unaudited)
Note 6 - Bank Line of Credit
The Partnership has a bank line of credit secured by its loan portfolio of
up to $3,500,000 at .25% over prime. The balances outstanding as of March 31,
2003 and December 31, 2002 were $250,000 and $0, respectively; the interest rate
was 4.50% (4.25% prime + .25%) at March 31, 2003. This line of credit expires
December 2007 and requires the Partnership to meet certain financial covenants.
As of March 31, 2003, the Partnership was in compliance with all loan covenants.
Should the general partners choose not to renew the line of credit, the
balance then outstanding would be converted to a three-year term loan.
Note 7 - Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Secured loans had a carrying value of $7,272,410 and $6,423,984, at March
31, 2003 and December 31, 2002, respectively. The fair value of these loans of
$7,088,368 and $6,030,669, respectively, was estimated based upon projected cash
flows discounted at the estimated current interest rates at which similar loans
would be made. The applicable amount of the allowance for loan losses along with
accrued interest and advances related thereto should also be considered in
evaluating the fair value versus the carrying value.
Note 8 - Asset Concentrations and Characteristics
The loans are secured by recorded deeds of trust. At March 31, 2003 and
December 31, 2002 there were 26 and 25 secured loans outstanding, respectively,
with the following characteristics:
March 31, December 31,
2003 2002
--------------- ----------------
Number of secured loans outstanding 26 25
Total secured loans outstanding $ 7,272,410 $ 6,423,984
Average secured loan outstanding $ 279,708 $ 256,959
Average secured loan as percent of total 3.85% 4.00%
Average secured loan as percent of Partners' capital 3.09% 2.84%
Largest secured loan outstanding $ 1,000,000 $ 1,000,000
Largest secured loan as percent of total 13.75% 15.57%
Largest secured loan as percent of Partners' capital 11.06% 11.05%
Number of counties where security is located (all California) 10 11
Largest percentage of loans in one county 36.55% 41.38%
Average secured loan to appraised value of security at time
loan was consummated 62.11% 65.86%
Number of secured loans in foreclosure 2 2
Amount of secured loans in foreclosure $ 236,807 $ 236,807
8
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003 (unaudited)
Note 8 - Asset Concentrations and Characteristics (continued)
The following categories of secured loans were held at March 31, 2003 and
December 31, 2002:
March 31, December 31,
2003 2002
-------------- --------------
First trust deeds $ 3,562,581 $ 3,269,897
Second trust deeds 3,636,658 2,939,753
Third trust deeds 73,171 214,334
-------------- --------------
Total loans 7,272,410 6,423,984
Prior liens due other lenders 6,468,369 5,475,725
-------------- --------------
Total debt $13,740,779 $11,899,709
============== ==============
Appraised property value at time of loan $22,121,579 $18,069,602
Total investments as percent of appraisals 62.11% 65.86%
Investments by type of property
Owner occupied homes $ 987,386 $ 1,037,474
Non-owner occupied homes 575,009 575,051
Apartments 1,508,648 708,648
Commercial 4,201,367 4,102,811
-------------- --------------
$ 7,272,410 $ 6,423,984
============== ==============
Scheduled maturity dates of secured loans as of March 31, 2003 are as
follows:
Year Ending December 31,
-----------------------------------
2003 $ 3,094,389
2004 711,087
2005 940,125
2006 96,716
2007 1,521,557
Thereafter 908,536
----------------
Total $ 7,272,410
================
The scheduled maturities for 2003 above include approximately $2,400,534 in
7 loans, which are past maturity at December 31, 2002. Interest payments on six
of these loans with an aggregate principal balance of $2,266,414 were
categorized as delinquent over 90 days.
Cash deposits per bank at March 31, 2003 of $210,184 were in one bank. The
balance exceeded FDIC insurance limits (up to $100,000 per bank) by $110,184.
The Partnership's main bank is the same financial institution that has provided
the Partnership with the $3,500,000 limit line of credit.
The Partnership has a substantial amount of its loan receivable balance due
from one borrower. This borrower accounted for approximately 25% of the loan
balance at March 31, 2003.
9
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003 (unaudited)
Note 9 - Commitments and Contingencies
Workout agreements
The Partnership has negotiated various contractual workout agreements with
borrowers whose loans are past maturity or who are delinquent in making
payments. The Partnership is not obligated to fund additional money as of March
31, 2003. As of March 31, 2003 the Partnership had two loans under workout
agreements totaling $64,999.
Construction loans
Periodically the Partnership has construction loans, which are at various
stages of completion. The Partnership approves the borrowers up to a maximum
loan balance; however, disbursements are made during completion phases
throughout the construction process. At March 31, 2003, all the construction
loans were paid off.
Legal proceedings
The Partnership is involved in various legal actions arising in the normal
course of business. In the opinion of management, such matters will not have a
material effect upon the financial position of the Partnership.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP
Critical Accounting Policies.
In preparing the financial statements, management is required to make
estimates based on the information available that affect the reported amounts of
assets and liabilities as of the balance sheet date. Such estimates relate
principally to the determination of (1) the allowance for loan losses (i.e. the
amount of allowance established against loans receivable as an estimate of
potential loan losses) including the accrued interest and advances that are
estimated to be unrecoverable based on estimates of amounts to be collected plus
estimates of the value of the property as collateral and (2) the valuation of
real estate acquired through foreclosure.
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. A provision is made for loan losses to
adjust the allowance for loan losses to an amount considered by management to be
adequate, with due consideration to collateral value, to provide for
unrecoverable loans and receivables, including impaired loans, other loans,
accrued interest, late fees and advances on loans and other accounts receivable
(unsecured). The Partnership charges off uncollectible loans and related
receivables directly to the allowance account once it is determined that the
full amount is not collectible.
Statement of Financial Accounting Standards Nos. 114 and 118 provide that
if the probable ultimate recovery of the carrying amount of a loan, with due
consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement and the shortfall in
the amounts due are not insignificant, the carrying amount of the investment
shall be reduced to the present value of future cash flows discounted at the
loan's effective interest rate. If a loan is collateral dependent, it is valued
at the estimated fair value of the related collateral. If events and or changes
in circumstances cause management to have serious doubts about the further
collectibility of the contractual payments, a loan may be categorized as
impaired and interest is no longer accrued. Any subsequent payments on impaired
loans are applied to reduce the outstanding loan balances including accrued
interest and advances.
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses. Actual
results could vary from the aforementioned provisions for losses.
Forward Looking Statements.
Some of the information in the Form 10-Q may contain forward looking
statements. Uses of words such as "will", "may", "anticipate", "estimate",
"continue" or other forward looking words, discuss future expectations or
predictions. The foregoing analysis of 2003 includes forward looking statements
and predictions about the possibility of future events, results of operations
and financial condition. As such, this analysis may prove to be inaccurate
because of assumptions made by the general partners or the actual development of
the future events. No assurance can be given that any of these statements or
predictions will ultimately prove to be correct or substantially correct.
Related Parties.
The general partners of the Partnership are Gymno Corporation and Michael
R. Burwell. Most Partnership business is conducted through Redwood Mortgage
Corp., an affiliate of the general partner, which arranges, services and
maintains the loan portfolio for the benefit of the Partnership. The fees
received by the affiliate to the general partners are paid pursuant to the
partnership agreement and are determined at the sole discretion of the affiliate
to the general partner. In the past, the affiliate to the general partners has
elected not to take the maximum compensation. The following is a list of various
Partnership activities for which related parties are compensated.
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, the Partnership may
collect an amount equivalent to 12% of the loaned amount until 6 months after
the termination date of the offering. Thereafter, the loan brokerage commissions
(points) will be limited to an amount not to exceed 4% of the total Partnership
assets per year. The loan brokerage commissions are paid by the borrowers, and
thus, are not an expense of the partnership. For the three months ended March 31
2003 and 2002, loan brokerage commissions paid by borrowers were $42,775 and
$3,900, respectively.
11
o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of
1% (1.5% on an annual basis) of the unpaid principal of the Partnership's loans
is paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located. Mortgage servicing fees of $16,154 and $51,667 were incurred for the
three months ended March 31, 2003 and 2002, respectively.
o Asset Management Fees The general partners receive monthly fees for
managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $8,517 and $8,881 were incurred by the Partnership for the three
months ended March 31, 2003 and 2002, respectively.
o Other Fees The Partnership agreement provides that the general partners
may receive other fees such as reconveyance, mortgage assumption and mortgage
extension fees. Such fees are incurred by the borrowers and are paid to the
general partners.
o Income and Losses All income and losses are credited or charged to
partners in relation to their respective Partnership interests. The allocation
to the general partners (combined) shall be a total of 1%.
o Operating Expenses An affiliate of the Partnership, Redwood Mortgage
Corp., is reimbursed by the Partnership for all operating expenses actually
incurred by it on behalf of the Partnership, including without limitation,
out-of-pocket general and administration expenses of the Partnership, accounting
and audit fees, legal fees and expenses, postage and preparation of reports to
limited partners. Such reimbursements are reflected as expenses in the statement
of income.
o Contributed Capital The general partners jointly and severally
contributed 1/10 of 1% in cash contributions as proceeds from the offerings were
received from the limited partners. As of March 31, 2003 and 2002, a general
partner, Gymno Corporation, had contributed $11,978 as capital in accordance
with Section 4.02(a) of the partnership agreement.
Results of Operations - For the three months ended March 31, 2003 and 2002
The net income decrease of $52,386 (26.64%) for the three months ended
March 31, 2003 versus the three month period ended March 31, 2002 was due
primarily to a decrease in interest earned on loans of $131,053(44.4%), an
increase in interest-interest bearing accounts of $485 (44.70%), an increase in
late charges of $2,127 (47.27%), and a decrease in other income of $10,297
(91.07%) offset by expense increases (decreases). Significant expense decreases
for the three month period ended March 31, 2003 versus March 31, 2002 included
lower mortgage servicing fees of $35,513, a decrease in the provision for losses
on loans and real estate of $28,103, a decrease in interest expense of $22,058,
and an increase in professional fees of $1,083.
The decrease in interest on loans of $131,053 (44.4%) for the three months
ended March 31, 2003 versus March 31, 2002 was due primarily to a reduction of
the loan portfolio to $7,272,410 from $9,899,551, and a reduction in average
portfolio interest rate as compared to the first quarter 2002.
The decrease in interest on the line of credit of $22,058 (99.24%) for the
three months ended March 31, 2003 versus March 31, 2002 is due to lower overall
usage of the line of credit during the first quarter of 2003. The Partnership
utilized its bank line of credit less during the first quarter of 2003 compared
to the first quarter of 2002. The outstanding balances of $250,000 at March 31,
2003 versus $1,207,000 at March 31, 2002 are reflective of the overall lower
credit line usage. Cash generated from interest earnings, late charges,
amortization of principal and loan payoffs was utilized to pay down the credit
line.
The decrease in mortgage servicing fees of $35,513 (68.73%) for the three
months ended March 31, 2003 versus March 31, 2002 is attributable to a decrease
in loan portfolio to $7,272,410 from $9,899,551. In addition, higher mortgage
servicing fees during the three months through March 31, 2002 was due to
collection of servicing fees on impaired loans during the first quarter of 2002.
The Partnership does not accrue servicing fees to Redwood Mortgage Corp. on
impaired loans. Rather, servicing fees on impaired loans are incurred as
borrower payments are received.
12
Loan loss recoveries of $22,372 occurred during the first quarter of 2003.
No further provision was made as the general partners felt that the allowance
for loan losses of $769,510 as of March 31, 2003 was more than adequate to
offset any potential loss in loans or real estate.
The decrease in asset management fees of $364 (4.10%) for the three months
ended March 31, 2003 versus the respective period ended March 31, 2002 is due to
a decrease in the partners' capital under management at March 31, 2003 and 2002
of $9,024,857 and $9,296,042, respectively.
The increase in professional fees of $1,083 (6.67%) for the three months
ended March 31, 2003 versus March 31, 2002 is due to timing of services provided
in 2003 compared to 2002 in relation to its audit and tax return processing.
Partnership capital continued to decrease as the limited partners capital
declined due to both earnings distribution and capital liquidations. For the
three months ended March 31, 2003 earnings and capital liquidated was $57,158
and $113,151, respectively versus $80,447 and $250,422, respectively for the
corresponding period in 2002.
At March 31, 2003, outstanding foreclosures remained at two ($236,807) from
the two ($986,372) that existed at March 31, 2002. These foreclosures are a
reflection of the difficult economic times at March 31, 2003 and March 31, 2002,
yet are not unusual in the general partners' experience and we do not anticipate
a reduction in net income due to these foreclosures.
The general partners received Mortgage Brokerage Commissions from the loan
borrowers of $42,775 for the three months ended March 31, 2003 as compared to
$3,900 for the three months ended March 31, 2002. The increase is due to more
loans written in the three months ended March 31, 2003.
During 2001, and through March 31, 2003, the Federal Reserve reduced
interest rates by cutting the Federal Funds Rate twelve times to 1.25%. The
effect of the previous cuts has greatly reduced short-term interest rates and to
a lesser extent reduced long-term interest rates. The general partners
anticipate that new loans will be placed at rates approximately 1% to 1.50%
lower than similar loans during early 2002. The lowering of interest rates has
encouraged those borrowers that have mortgages with higher interest rates than
those currently available to seek refinancing of their obligations. The
Partnership may face prepayments in the existing portfolio from borrowers taking
advantage of these lower rates. However, demand for loans from qualified
borrowers continues to be strong and as prepayments occur, the general partners
expect to replace paid off loans with loans at somewhat lower interest rates. At
this time, the general partners believe that the average loan portfolio interest
rate will decline approximately .50% to .75% over the year 2003. Nevertheless,
based upon the rates payable in connection with the existing loans, and
anticipated interest rates to be charged by the Partnership and the general
partners' experience, the general partners anticipate that the annualized yield
will range between 6.75% and 7.30% in 2003.
Borrower foreclosures, as set forth under Results of Operations, are a
normal aspect of Partnership operations and the general partners anticipate that
they will not have a material effect on liquidity. As of March 31, 2003, there
were two properties in foreclosure. The principal amount of these foreclosures
was $236,807. Cash is constantly being generated from interest earnings, late
charges, pre-payment penalties, amortization of principal and loan pay-offs.
Currently, cash flow exceeds Partnership expenses, earnings and capital payout
requirements. Excess cash flow will be invested in new loan opportunities, when
available, and will be used to reduce the Partnership credit line or in other
Partnership business.
13
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these properties,
the real estate held for sale expenses and sales activities, borrowers payment
records, etc. Data on the local real estate market and on the national and local
economy are studied. Based upon this information and other data, loss reserves
are increased or decreased. Borrower foreclosures are a normal aspect of
Partnership operations. The Partnership is not a credit based lender and hence
while it reviews the credit history and income of borrowers, and if applicable,
the income from income producing properties, the general partners expect that we
will on occasion take back real estate security. During 2001, and continuing in
2002 and 2003, the Northern California real estate market slowed and the
national and local economies have slipped into recession. As of March 31, 2003,
two notices of default are currently filed beginning the process of foreclosing
two additional loans. The principal amounts of the two foreclosed loans total
$236,807 or 3.26% of our loan portfolio. The Partnership also entered into
workout agreements with borrowers who are past maturity or delinquent in their
regular payments. The Partnership had workout agreements on approximately 2
loans totaling $64,999 as of March 31, 2003. Typically, a workout agreement
allows the borrower to extend the maturity date of the balloon payment and
allows the borrower to make current monthly payments while deferring for periods
of time, past due payments, or allows time to pay the loan in full. These
workout agreements and foreclosures generally exist within our loan portfolio to
greater or lesser degrees, depending primarily on the health of the economy. The
number of foreclosures and workout agreements will rise during difficult times
and conversely fall during good economic times. The number and amount of
foreclosures and workout agreements existing at March 31, 2003, in management's
opinion, does not have a material effect on our results of operations or
liquidity. These workouts and foreclosures have been considered when management
arrived at appropriate loan loss reserves and based on our experience, are
reflective of our loan marketplace segment. Because of the number of variables
involved, the magnitude of the possible swings and the general partners
inability to control many of these factors, actual results may and do sometimes
differ significantly from estimates made by the general partners. Management
provided ($22,372) and $5,731, as provisions for losses on loans and real estate
for the three months ended March 31, 2003 and 2002, respectively. The reserve
for losses on loans and real estate had a balance of $769,510 as of March 31,
2003. This balance reflects reduced expected loan or real estate anticipated
losses in 2003 and that current reserves are adequate to handle potential
losses. If conditions change, the Partnership may again increase its provisions
for loan and real estate losses.
The Partnership makes loans primarily in Northern California. As of March
31, 2003, approximately 57.77%, ($4,201,144) of the loans held by the
Partnership were in the six San Francisco Bay Area Counties. The remainder of
the loans held were secured primarily by Northern California real estate outside
the San Francisco Bay Area. Like the rest of the nation, the San Francisco Bay
Area has felt the recession and accompanying slow down in economic growth and
increasing unemployment. The technology companies of Silicon Valley, the airline
industry, the tourism industry and other industries are feeling the effects of
the overall United States recession, which includes lower earnings, losses and
layoffs.
As of March 31, 2003, the Partnership had an average loan to value ratio
computed as of the date the loan was made of 62.11%. This percentage does not
account for any increases or decreases in property values since the date the
loan was made, nor does it include any reductions in principal through
amortization of payments after the loan was made. This low loan to value ratio
will assist the Partnership in weathering loan delinquencies and foreclosures
should they eventuate.
PORTFOLIO REVIEW - For the three months ended March 31, 2003 and 2002.
Loan Portfolio
The Partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of March 31, 2003 and
2002 the Partnership's loans secured by real property collateral in the six San
Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda,
Contra Costa, and Marin) represented $4,201,144 (57.77%) and $6,485,539 (65.51%)
of the outstanding loan portfolio. The remainder of the portfolio represented
loans secured by real estate located primarily in Northern California.
14
As of March 31, 2003, approximately 21.48% ($1,562,396), was invested in
loans secured by single family homes (1-4 units), approximately 20.75%
($1,508,648), was invested in loans secured by multifamily dwellings (apartments
over 4 units), approximately 28.11% ($2,044,309), was invested in loans secured
by commercial properties, and approximately 29.66% ($2,157,057) was invested in
loans secured by land. As of March 31, 2002, approximately 18.39% ($1,820,339),
was invested in loans secured by single family homes (1-4 units), approximately
15.79% ($1,563,213) was invested in loans secured by multifamily dwellings
(apartments over 4 units), approximately 39.65% ($3,924,789) was invested in
loans secured by commercial properties, and approximately 26.17% ($2,591,210)
was invested in loans secured by land.
As of March 31, 2003, the Partnership held 26 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the loans held by the Partnership as of March 31, 2003:
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of March 31, 2003
# of Loans Amount Percent
------------- -------------- ------------
1st Mortgages 13 $3,562,581 49%
2nd Mortgages 12 3,636,658 50%
3rd Mortgages 1 73,171 1%
============ ============== ============
Total 26 $7,272,410 100%
Maturing 12/31/03 and prior 13 $3,094,389 43%
Maturing prior to 12/31/04 3 711,087 10%
Maturing prior to 12/31/05 2 940,125 13%
Maturing after 12/31/05 8 2,526,809 34%
============ ============== ============
Total 26 $7,272,410 100%
Average Loan $ 279,708 4%
Largest Loan 1,000,000 14%
Smallest Loan 11,373 0.16%
Average Loan-to-Value 62%
Borrower Liquidity and Capital Resources.
At the time of subscription to the Partnership, limited partners made an
irrevocable decision to either take distributions of earnings monthly, quarterly
or annually or to compound earnings in their capital account. For the three
months ended March 31, 2003 and 2002, the Partnership made distributions of
earnings to limited partners of $57,158 and $80,447, respectively. Distribution
of Earnings to limited partners, which were not withdrawn for the three months
ended March 31, 2003 and 2002 were $85,645 and $114,218, respectively. As of
March 31, 2003 and 2002, limited partners electing to withdraw earnings
represented 37%and 42% of the limited partners' capital.
The Partnership also allows the limited partners to withdraw their capital
account subject to certain limitations (see liquidation provisions of
partnership agreement). For the three months ended March 31, 2003 and 2002,
$9,440 and $33,291 were liquidated subject to the 10% penalty for early
withdrawal. These withdrawals are within the normally anticipated range that the
general partners would expect in their experience in this and other
partnerships. The general partners expect that a small percentage of limited
partners will elect to liquidate their capital accounts over one year with a 10%
early withdrawal penalty. In originally conceiving the Partnership, the general
partners wanted to provide limited partners needing their capital returned a
degree of liquidity. Generally, limited partners electing to withdraw over one
year need to liquidate their investment to raise cash. The trend the Partnership
is experiencing in withdrawals by limited partners electing a one year
liquidation program represents a small percentage of limited partner capital as
of March 31, 2003 and 2002, respectively.
15
Additionally, for the three months ended March 31, 2003 and 2002, $103,711
and $217,131, respectively, were liquidated by limited partners who have elected
a liquidation program over a period of five years or longer. This ability to
withdraw after five years by limited partners has the effect of providing
limited partner liquidity. The general partners expect a portion of the limited
partners to take advantage of this provision. This has the anticipated effect of
the Partnership growing, primarily through reinvestment of earnings in years one
through five. The general partners expect to see increasing numbers of limited
partner withdrawals in years five through eleven, after which time the bulk of
those limited partners who have sought withdrawal have been liquidated. After
year eleven, liquidation generally subsides.
In some cases in order to satisfy Broker Dealers and other reporting
requirements, the general partners have valued the limited partners' interest in
the Partnership on a basis which utilizes a per Unit system of calculation,
rather than based upon the investors' capital account. This information has been
reported in this manner in order to allow the Partnership to integrate with
certain software used by the Broker Dealers and other reporting entities. In
those cases, the Partnership will report to Broker Dealers, Trust Companies and
others a "reporting" number of Units based upon a $1.00 per Unit calculation.
The number of reporting Units provided will be calculated based upon the limited
partner's capital account value divided by $1.00. Each investor's capital
account balance is set forth periodically on the Partnership account statement
provided to investors. The reporting Units are solely for Broker Dealers
requiring such information for their software programs and do not reflect actual
Units owned by a limited partner or the limited partners' right or interest in
cash flow or any other economic benefit in the Partnership. Each investor's
capital account balance is set forth periodically on the Partnership account
statement provided to investors. The amount of Partnership earnings each
investor is entitled to receive is determined by the ratio that each investor's
capital account bears to the total amount of all investor capital accounts then
outstanding. The capital account balance of each investor should be included on
any NASD member client account statement in providing a per Unit estimated value
of the client's investment in the Partnership in accordance with NASD Rule 2340.
While the general partners have set an estimated value for the Partnership
Units, such determination may not be representative of the ultimate price
realized by an investor for such Units upon sale. No public trading market
exists for the Partnership's Units and none is likely to develop. Thus, there is
no certainty that the Units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain liquidation rights provided by the
Partnership, which may include early withdrawal penalties (See the section of
the Prospectus entitled "Risk Factors - Purchase of Units is a long term
investment").
Current Economic Conditions.
As contained in a collection of real estate statistics listed in the San
Francisco Chronicle dated February 21, 2003, Bay Area home sales slowed in
January but prices rose. The article stated, "The torrid pace of home sales in
the Bay Area cooled slightly in January, but the median price year-over-year
rose nearly 9 %, a real estate information firm said Thursday. The median price
of a house in the nine-county Bay Area was $404,000 in January, up 8.9% from the
year-ago median of $371,000, but down 2.9% from the December median of $416,000.
Last summer, the Bay Area median reached an all-time high of $417,000. The
median is the midpoint; half of the sales prices in the month were below and
half were above $404,000. A total of 6,944 houses and condos sold last month in
the nine counties, down 0.7% from the 6,990 sold in January 2002. Sales dropped
19% in Napa, 2.1% in San Francisco and 7.6% in Santa Clara.
Researchers at DataQuick in La Jolla (San Diego County) said the drop
reflects stronger-than-expected sales in January 2002, when buyers who had fled
the market after September 11 terrorist attacks returned, prompted largely by
falling interest rates. The January 2002 sales figure was the highest for that
month in a decade. `Everyone put things on hold (after Sept. 11), and several
months later, people jumped back in,' said John Karevoll, DataQuick researcher.
Although sales fell 19% in Napa County, the median price there jumped 31.1% to
$405,000 - though Karevoll pointed out the county routinely has the fewest sales
per month. In San Francisco, the median price rose 8.5% to $539,000. Santa
Clara, hit hard by the dot-com bust, saw the smallest rise in median home price
- - up 4.9% to $447,000. Economists are keeping a close eye on the housing market,
one of the few bright sectors in an otherwise stormy economy. To some pundits,
the Bay Area market, in particular, has raised red flags because home prices
have continued to rise despite widespread layoffs and a beleaguered technology
sector."
16
January Home Sales
------------------------------------------------------------------------------------------------------------------
Sold* Sold* Pct. Median Median Pct.
Jan. 02 Jan. 03 Change Jan. 02 Jan. 03 Change
---------- ---------- ------------ ------------ ------------- -----------
Alameda 1,478 1,471 -0.5% $358,000 $392,000 9.5%
Contra Costa 1,319 1,392 5.5 309,000 355,000 14.9
Marin 259 269 3.9 502,000 535,000 6.6
Napa 163 132 -19.0 309,000 405,000 31.1
San Francisco 375 367 -2.1 497,000 539,000 8.5
San Mateo 581 541 -6.9 478,000 507,000 6.1
Santa Clara 1,635 1,510 -7.6 426,000 447,000 4.9
Solano 601 658 9.5 238,000 276,000 16.0
Sonoma 579 604 4.3 297,000 343,000 15.5
Bay Area 6,990 6,944 -0.7 371,000 404,000 8.9
*Sales include new and existing houses and condos.
Source: DataQuick Information Systems, www.dqnews.com
For the Partnership, these statistics imply that the values of the homes
secured by mortgages should remain firm and assist in reducing losses if the
take back of collateral through the foreclosure process should eventuate.
In spite of the slowing economy, commercial lending opportunities exist
which the Partnership may advantage itself of.
According to the San Francisco Business Times of the week of January 3,
2003, the real estate market took its first steps on the long road back. The
article states, "After back-to-back terrible years, the mere fact that 2003 is
not likely to be worse counts as good news. The market seems to be at the bottom
of the bottom and it may see a slight improvement in 2003. None of real estate's
highly paid crystal ballers, including University of California, Berkeley's Ken
Rosen, is predicting major improvement in 2003 because they don't see
significant job creation. The uncertainty of war in the Middle East and
continuing problems in high tech and travel, meanwhile, conspire to keep the lid
on chances for a major recovery in 2003. That doesn't mean that there won't be
major lease deals. Orrick Herrington & Sutcliffe will likely sign a
150,000-square-foot lease in San Francisco at either Foundry Square or 400
Sansome Street that will have more value than any lease signed throughout 2002
anywhere in the region.
Commercial vacancy in San Francisco hovers around 20% while down on the
harder hit Peninsula it is closer to 25%. Nobody dares calculate shadow space -
those canyons of empty cubicles that corporations aren't using or subleasing.
That space has to fill before companies absorb new space, a factor likely to
further delay any recovery. New office building, which tends to lag a recovery
in the leasing market, is still several years away, barring some plans by
government agencies. `It will be another lean year with some pockets of activity
in non-cyclical areas such as the nonprofits,' said Dave Klein, senior vice
president of BT Commercial. `Education and nonprofits will suck up a lot of
space, but demand from the big corporate office users will still be soft. We're
at the bottom of the bottom now and after 10 consecutive quarters of negative
absorption we could see some slight positive absorption by the end of the first
quarter.'
Major foreclosures have been noticeably absent thus far in the downturn
thanks to microscopic interest rates. If landlords continue to have to carry
empty buildings, bankruptcy courts could see more activity this year.
To the Partnership, stabilizing vacancy rates may mean that we are at the
vacancy rate bottom. High levels of space exist, and as tenant leases expire
they may be able to negotiate lower rental rates. This could lead to lower cash
flows for owners, which may mean we could experience higher foreclosures or
delinquencies.
17
Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money
market accounts, secured loans held in the Partnership's portfolio and a note
payable on our line of credit as of March 31, 2003. The presentation, for each
category of information, aggregates the assets and liabilities by their maturity
dates for maturities occurring in each of the years 2003 through 2007 and
separately aggregates the information for all maturities arising after 2007. The
carrying values of these assets and liabilities approximate their fair market
values as of March 31, 2003:
2003 2004 2005 2006 2007 Thereafter Total
-------------- ----------- ----------- ----------- ------------ ------------ -------------
Interest earning assets:
Money market accounts $ 3,020 $ 3,020
Average interest rate 1.00% 1.00%
Loans secured by deeds
of trust $3,094,390 711,086 940,125 96,716 1,521,557 908,536 $7,272,410
Average interest rate 11.22% 10.46% 9.87% 6.50% 8.13% 8.73% 9.95%
Interest bearing
liabilities:
Line of credit $ 250,000 $ 250,000
Average interest rate 4.50% 4.50%
Market Risk.
The Partnership's line of credit bears interest at a variable rate, tied to
the prime rate. As a result, the Partnership's primary market risk exposure with
respect to its obligations is to changes in interest rates, which will affect
the interest cost of outstanding amounts on the note payable. The Partnership
may also suffer market risk tied to general trends affecting real estate values
that may impact the Partnership's security for its loans.
The Partnership's primary market risk in terms of its profitability is the
exposure to fluctuations in earnings resulting from fluctuations in general
interest rates. The majority of the Partnership's mortgage loans (100% as of
March 31, 2003) earn interest at fixed rates. Changes in interest rates may also
affect the value of the Partnership's investment in mortgage loans and the rates
at which the Partnership reinvests funds obtained from loan repayments and new
capital contributions from limited partners. If interest rates increase, the
interest rates the Partnership obtains from reinvested funds will generally
increase, but the value of the Partnership's existing loans at fixed rates will
generally tend to decrease. The risk is mitigated by the fact that the
Partnership does not intend to sell its loan portfolio, rather such loans are
held until they are paid off. If interest rates decrease, the amounts becoming
available to the Partnership for investment due to repayment of Partnership
loans may be reinvested at lower rates than the Partnership had been able to
obtain in prior investments, or than the rates on the repaid loans. In addition,
interest rate decreases may encourage borrowers to refinance their loans with
the Partnership at a time where the Partnership is unable to reinvest in loans
of comparable value.
The Partnership does not hedge or otherwise seek to manage interest rate
risk. The Partnership does not enter into risk sensitive instruments for trading
purposes.
Controls and Procedures.
Within the 90 days prior to the date of this report, the general partner of
the Partnership carried out an evaluation, under the supervision and with the
participation of the general partner's management, including the general
partner's President and Chief Financial Officer, of the effectiveness of the
design and operation of the Partnership's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the President
and Chief Financial Officer of the general partner concluded that the
Partnership's disclosure controls and procedures are effective. There were no
significant changes in the Partnership's internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.
18
ASSET QUALITY
A consequence of lending activities is that occasionally losses will be
experienced and that the amount of such losses will vary from time to time,
depending upon the risk characteristics of the loan portfolio as affected by
economic conditions and the financial experiences of borrowers. Many of these
factors are beyond the control of the general partners. There is no precise
method of predicting specific losses or amounts that ultimately may be charged
off on particular segments of the loan portfolio, especially in light of the
current economic environment.
The conclusion that a loan may become uncollectible, in whole or in part,
is a matter of judgment. Although institutional lenders are subject to
requirements and regulations that, among other things, require them to perform
ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and
to obtain and maintain current information regarding their borrowers and the
securing properties, the Partnership is not subject to these regulations and has
not adopted these practices. Rather, the general partners, in connection with
the periodic closing of the accounting records of the Partnership and the
preparation of the financial statements, determine whether the allowance for
loan losses is adequate to cover potential loan losses of the Partnership. As of
March 31, 2003 the general partners have determined that the allowance for loan
losses of $769,510 (8.5% of net assets) is adequate in amount. Because of the
number of variables involved, the magnitude of the swings possible and the
general partners' inability to control many of these factors, actual results may
and do sometimes differ significantly from estimates made by the general
partners. As of March 31, 2003, 9 loans were delinquent over 90 days amounting
to $3,034,446.
19
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
The Partnership has no officers or directors. The Partnership is managed by
the general partners. There are certain fees and other items paid to management
and related parties.
A more complete description of management compensation is found in the
Prospectus part of Form S-11 and subsequent amendments related to the offering
of Partnership interests, pages 12-13, under the section "Compensation of the
General Partners and the Affiliates", which are incorporated by reference. Such
compensation is summarized below.
The following compensation has been paid to the general partners and
affiliates for services rendered during the three months ended March 31, 2003.
All such compensation is in compliance with the guidelines and limitations set
forth in the Prospectus.
Entity Receiving
Compensation Description of Compensation and Services Rendered Amount
- -------------------------------------------------------------------------------------------------------------
I. Redwood Mortgage Corp. Loan Servicing Fee for servicing loan ...............................$16,154
General Partners
&/or Affiliates Asset Management Fee for managing assets .............................$8,517
General Partners 1% interest in profits ...............................................$1,442
II. FEES PAID BY BORROWERS ON LOANS PLACED BY COMPANIES RELATED TO THE GENERAL
PARTNERS WITH THE PARTNERSHIP (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP)
Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in connection with
the review, selection, evaluation, negotiation, and extension of the
loan paid by the borrowers and not by the Partnership......................$42,775
Redwood Mortgage Corp. Processing and Escrow Fees for services in connection with notary,
document preparation, credit investigation, and escrow fees paid by
the borrowers and not by the Partnership .....................................$987
Gymno Corporation, Inc. Reconveyance Fee..............................................................$180
III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN
EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE
STATEMENT OF INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,485
20
PART 2
OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership periodically is a defendant in various legal
actions. Please refer to Note 9 of the Financial Statements.
Item 2. Changes in the Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(99.1) Certification of Michael R. Burwell, General Partner
(99.2) Certification of Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of
Gymno Corporation, General Partner
(b) Form 8-K
Not Applicable
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on the 15th day of May
2003.
REDWOOD MORTGAGE INVESTORS VII
By: /S/ Michael R. Burwell
-----------------------------------
Michael R. Burwell, General Partner
By: Gymno Corporation, General Partner
By: /S/ Michael R. Burwell
----------------------------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacity indicated on the 15th day of May 2003.
Signature Title Date
/S/ Michael R. Burwell
- ------------------------
Michael R. Burwell General Partner May 15, 2003
/S/ Michael R. Burwell
- ------------------------
Michael R. Burwell President, Secretary/Treasurer May 15, 2003
of Gymno Corporation (Principal
Financial and Accounting
Officer); Director of Gymno
Corporation
22
Exhibit 99.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is made known to us,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
May 15, 2003
23
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VII
(the "Partnership") on Form 10-Q for the period ending March 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the
Partnership, certify, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, General Partner
May 15, 2003
24
Exhibit 99.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is made known to us,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
- ---------------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
May 15, 2003
25
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VII
(the "Partnership") on Form 10-Q for the period ending March 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General
Partner of the Partnership, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
- -------------------------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial
Officer of Gymno Corporation, General Partner
May 15, 2003
26